Slow To Pay Funders Causing Service Bottlenecks

December 1, 2010       Kate Rogers      

More than half of nonprofit human service organizations encountered trouble during the past year with either government contracts or grants. Of the 33,000 human service providers nationally there were nearly 200,000 government contracts and grants in 2009.

According to a study by the Urban Institute in Washington, D.C., late payments, complicated applications and funding cuts are among the many problems human services nonprofits are facing in contracting with government at all levels.

In its report, National Study of Nonprofit-Government Contracting: State Profiles, organizations often had to take drastic measures to make up for these funding issues, with 42 percent reporting a budget deficit in 2009. Half of all organizations surveyed cut or froze employee salaries and approximately 40 percent of human services organizations drew on reserves or cut staff.

The state profile data were based on the results of a national survey of human service providers. The sample of human service nonprofits was selected randomly from the Urban Institute’s National Center for Charitable Statistics files, and the organizations were only those who were required to file a federal Form 990 and had more than $100,000 in expenditures during 2007. Those included in the study were limited to providers of direct support to children, youth, families, adults and people with disabilities.

Katie Roeger, research associate for the Urban Institute, said nonprofits are averaging six contracts each from local to federal governments, and there is no standard format for these applications. For this reason, organizations are spending valued resources and manpower on the application process itself, with no guarantee of funding once it is complete.

“If there was one standardized form that everyone was using for contracts they could focus a lot more time and attention on programs,” Roeger said.

Organizations across the board are trying everything before cutting services, she said. Freezing salaries, cutting staffing and dipping into reserve accounts occur before turning away those in need.

Competition for the federal dollar is fierce, according to Irv Katz, president and CEO of the National Human Services Assembly in Washington, D.C., whose human service nonprofit members receive approximately 40 percent of their funding via government contracts. Cuts in contract funding coupled with a decrease in donations to human services organizations are a devastating reality for many organizations, Katz said.

“They can’t make up for this lost income,” he said. “It just can’t be done. Between government and fundraising cutsÉ they can’t make up for it in volunteerism. The only option is reductions in services.”

Many agencies have made strategic cuts, shutting down programs that can no longer be funded and operated efficiently, he said. Others have taken more of a bare bones approach, keeping programs that were in the highest demand at the top of their priorities during trying times. Katz also said organizations with like-minded missions are consolidating to serve the ever-increasing need for their assistance.

“National networks are looking at ways to streamline and consolidate their administrative functions. There is a move toward consolidation, moving toward a regional strategy,” Katz said. The survey showed that 54 percent of human service nonprofits have grants that require the matching or sharing of costs. The number varies by state, reaching 82 percent in New Hampshire, and dropping to 37 percent in Arizona.

The extent to which they have to match this funding was surprising from the research team’s standpoint. Prior to the survey, Roeger said she was unaware that organizations often have to match the total amount of funding they are set to receive, and government often makes these payments late despite fundraising efforts by charities.

Contracts and grants also limit the amount of money that can be used for program or organizations’ administrative costs. It varied widely by state going as high as 78 percent of groups in Utah and as low as 29 percent in North Dakota.

Risk is a major issue here for nonprofits, according to Jill Schumann, president and CEO of Lutheran Services in America, headquartered in Baltimore, Md. Human services organizations are driven by a “zero risk” policy, meaning they are operating under the goal of ensuring no client is ever at risk, under government contracts.

“The whole system is based on ‘no risk,’ meaning it’s highly regulated, highly controlled and has expensive overhead,” Schumann said. “If payments are reduced, they still have to provide the same service, and it increases risk.”

The process of charities cutting their way to sustainability doesn’t fair well for any party involved, she said — government, nonprofits or beneficiaries.

“This is the wrong time to let human service infrastructure collapse,” she said. “It is a resilient sector, but my fear is that because of that resilience there is an increasing mentality that government can do less and the nonprofit sector can pick up more. That is not realistic, and it’s worrisome.”

The biggest problem with governments is unwillingness to pay on time, Roeger said. “If a nonprofit does not receive its money, they have already provided services they are left to try and cope and fill that gap until they receive those funds,” she said. “It takes a lot of time and resources for those nonprofits. If government would pay on time that would help nonprofits, they wouldn’t have to try and supplement and draw on reserves.”

Katz said government should look at the long-term effects of cuts in funding human services organizations. Possibly moving the government funding out of a federal discretionary budget into funding for human capital development budget is one idea he mentioned.

“These are not ‘fix-it’ programs,” he said. “They are programs that develop children, youth and families and allow them to care for themselves. They are an investment in people and nonprofit organizations are serving as agents of the government. We have to change the discussion from one of agencies ‘benefitting’ from government funding to them serving the public will, helping more people to be a stronger nation.”

The contracts and applications should be more uniform, Katz added, to lighten the stress and impact of the process.

“The U.S. government needs to act like one government as opposed to thousands of silos of mini organizations. Departments that fund similar programs ought to have similar contracting methods,” Katz said. “We have no human development strategy in the U.S., and when you have no strategy you are dealing only with problems.”

The road to recovery is long no matter how the issues are framed, Schumann said. Nonprofits tend to recover slowly from poor economic times, and human services nonprofits are often slower. “We are looking at years here, not months.” NPT

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